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Selling Property in a Bankruptcy Case

March 21, 2018 David E. Sklar

item sale tag that says for saleDo you own real property that has equity in it, but are in default on your mortgage obligations? If so, then bankruptcy could be an option for you to be able to sell the property to protect the equity in the property.

Advantages of Bankruptcy

You may be wondering why you need a bankruptcy case to sell the property. Many people turn to bankruptcy to utilize the automatic stay bankruptcy provides. The automatic stay comes into effect when a bankruptcy is filed under Section 362 of the Bankruptcy Code. This causes all creditor collection actions to cease once the bankruptcy case is filed. Accordingly, a scheduled sheriff sale or foreclosure proceeding would not be able to go forward once the bankruptcy triggers the automatic stay. However, if the sheriff sale has already occurred, then you no longer have ownership of the property to be protected by the automatic stay. Thus, it is extremely important to file the bankruptcy prior to the sheriff sale.

Which Chapter to File

The three chapters of bankruptcy available to you are chapters 7, 11 and 13 unless you are a farm or municipality. If you file a chapter 7 bankruptcy, then a trustee will be appointed to administer your case. Once you file a chapter 7 bankruptcy case, the trustee will control the sale of the property. The trustee will look to sell the property towards repayment of your creditors. However, the trustee will accumulate administrative fees, which will also be paid out of the sale of the real property. Often, these fees will add up to a substantial figure through the administration of the bankruptcy case. In a chapter 7 bankruptcy case, outside of an allowed real property exemption, you will only receive money from the sale of your real property once all creditors and case fees have been paid in full. As a result, if your plan in filing for bankruptcy is to maximize your equity in property, then chapter 7 is often the wrong path for you to take.

In a chapter 11 bankruptcy or chapter 13 bankruptcy, you will be in control of the sale process. It is important to recognize that any sale of real property in bankruptcy is subject to court approval pursuant to Section 363 of the Bankruptcy Code. Only an individual can file a chapter 13 bankruptcy case. Therefore, if the real property is owned by a limited liability company, then the limited liability company would need to file a chapter 11 bankruptcy case. A member of the limited liability company that owns real property could not file for bankruptcy to stop creditor collection actions on that real property. The reason for this is that the real property is not an asset of that individual’s bankruptcy estate. Rather, only the membership interest in the limited liability corporation is an asset of the bankruptcy estate. The same rules apply if the entity owning real property is a corporation.

Another factor that could push you towards filing a chapter 11 bankruptcy rather than a chapter 13 bankruptcy are the debt limits in a chapter 13 bankruptcy. Section 109(e) of the Bankruptcy Code mandates that a chapter 13 debtor can only have non-contingent, liquidated secured debts of $1,184,200.00 and non-contingent, liquidated unsecured debts $394,725. Generally speaking, you would prefer to fit within a chapter 13 bankruptcy rather than a chapter 11 bankruptcy if it is possible. Reasons for this include that it is easier to confirm a plan in chapter 13, administrative costs and hurdles are less in chapter 13 and you do not need votes in favor of a chapter 13 plan.

If you are considering filing for bankruptcy, it is important to contact an experienced New Jersey bankruptcy attorney to guide you through your options and present you with the potential pitfalls. For questions regarding a potential bankruptcy, call the law firm of Scura, Wigfield, Heyer, Stevens & Cammarota, LLP for a free consultation.

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Whether you need to completely eliminate your debt through Chapter 7 bankruptcy, or need to reorganize your credit payments through Chapter 13 or Chapter 11, we are well qualified as a full-service bankruptcy law firm for people in these and other New Jersey counties: Passaic County, Hudson County, Essex County, Bergen County, Morris County, and Sussex County. Call us today at 973-870-0434 or toll free 888-412-5091.



David E. Sklar

Prior to joining Scura, Wigfield, Heyer, Stevens & Cammarota, LLP, David Sklar graduated from Rutgers University-Newark School of Law with a J.D., Cum Laude. Mr. Sklar was the recipient of a Pro Bono Award and was honored by the New Jersey Bar Association for his commitment to the Street Law Program by being awarded the Street Law Prize.

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